WASHINGTON — The Office of the Comptroller of the Currency is "ready to take action" against banks that are releasing reserves too quickly solely to boost earnings, Comptroller of the Currency Thomas Curry said Monday.

In a speech to the Risk Management Association in Dallas, Curry said he remained "very concerned" about institutions releasing loan loss reserves too early while the economy is still in recovery mode. Risk remains elevated in the real estate sector, and banks will continue to face challenges collecting loan payments, he said.

"To be clear, I am not saying that we see an immediate problem at national banks and federal savings associations that demands urgent corrective action," Curry said in prepared remarks. "But I am saying that we are watching reserves very closely, and we expect national banks and federal savings associations to maintain them at appropriate levels. We are ready to take action if and when it is needed."

Curry raised similar concerns in a speech Sept. 20 to the Financial Services Roundtable, saying the OCC was keeping a close eye on loan loss allowances, and citing ongoing weaknesses with operational risk management, especially at more complex institutions.

In his speech on Monday, however, Curry added more detail on his concerns, including a warning that the economic environment remains challenging.

Commercial property fundamentals are improving, he said, but net operating income and property values are likely to remain below prior peaks for office buildings, retail space and warehouses in most markets in the near term.

Nonperforming home equity lines of credit are also up sharply from 2008, Curry said, and net charge-off rates are still well above their pre-crisis lows. Even more worrisome is that most HELOCs — just over 80% of the lines outstanding — were originated between 2004 and 2008, and most of them only required borrowers to make interest payments for the first seven to 10 years, after which the loans either begin to amortize or mature.

"Our concern is that many of the borrowers who are able to make interest-only payments in the current low rate environment may not be able to make amortizing payments," Curry said. "And with so many properties underwater, many homeowners who can't pay off balloons may not have enough equity in their house to refinance."

"So, collectability is clearly a problem almost across the board, and that argues against allowing real estate related reserves to fall."

Although reserves remain high across the industry, he said quarterly provisions are not keeping pace with charge-offs.

"In fact, if provisioning continues at current levels and charge-offs remain constant, the allowance as a share of noncurrent loans could return to historical lows in just a few years," he said. "With fresh memories of the financial crisis and a deep recession that led to hundreds of bank and thrift failures, that has to be a matter of concern to all of us."

But how much is enough? Curry acknowledged it's a difficult question for banks, which must adhere to strict accounting rules that favor lower reserves when credit conditions improve.

But he said banking regulators are working with the accounting and audit oversight bodies — including the Securities and Exchange Commission and Public Company Accounting Oversight Board—on an outreach campaign to make sure the industry knows there is broad agreement on the essential requirements of the process for estimating the appropriate provision levels.

"We both agree that judgment has to be part of the process of setting the allowance," Curry said. "And we also agree that the process requires documentation and a strong underlying rationale."

Curry said he still has a concern about the "incurred loss model" — which calculates the provision based only on losses that are expected — and whether it relies too heavily on historical experience. Even with the caveat that bankers can use their own judgment when applying the incurred loss model, the model has limitations, Curry said.

"The industry recognizes those limitations, and the Financial Accounting Standards Board is working on a more forward looking approach," he said. "I can tell you that all of the bank regulatory agencies are very supportive of that initiative, and we at the OCC will be actively engaged in providing our analysis and feedback."

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